Remittances, financial development, and income inequality: A panel quantile regression approach

Abstract

This paper studies the association between remittances, financial development, and income inequality for a sample of 70 developing countries from 1984 to 2019. Most of the existing studies in the literature have examined either the remittances and inequality relationship or the financial development and inequality relationship, but only a few have looked at the effect of both remittances and financial development on inequality. However, none of the existing studies have looked at the combined effect of these two on inequality. Our contribution to the literature is manifold. First and foremost, we examine whether remittances and financial development are substitutes or complements in reducing inequality and find evidence that, in countries that are more unequal, remittances substitute financial development in reducing inequality. But, in countries that are less unequal, remittances complement financial development in reducing inequality. Second, we find that the substitutionary effect of remittances is larger than their complementary effect. And finally, while previous studies have assumed that remittances and financial development have homogenous effects on inequality, we find that remittances and financial development exert heterogeneous effects across the conditional distribution of inequality.